Econ Exam 3

Front 1

Which of the following features does an economic union have?

i. Free trade among the members
ii. Common external tariffs
iii. Free movement of factors of production
iv. Harmonization of all economic policies

Back 1

I, II, III, and IV

Front 2

The NAFTA is an example of a:
a. Free trade area
b. Customs union
c. Common market
d. Economic union

Back 2

Free trade area

Front 3

Which of the following states that any trade concession given to any foreign country must be given to all other countries having the same status?
a. A trade embargo
b. A trade bloc
c. The most favored nation principle
d. Trade creation

Back 3

The most favored nation principle

Front 4

Which of the following is the net volume of new trade that results from the formation of a trade bloc?
a. Trade creation
b. Trade diversion
c. Trade bloc
d. Trade embargo

Back 4

Trade creation

Front 5

Which of the following is the volume of trade that is redirected from low-cost exporters to higher-cost trade bloc member countries?
a. Trade creation
b. Trade diversion
c. Trade bloc
d. Trade embargo

Back 5

Trade diversion

Front 6

Which of the following statements about a trade bloc is accurate?

I. The gains from a trade bloc are shared equally by each member.
II. Increased competition within a trade bloc can reduce prices and therefore provide additional gains as well as lead to lower costs of production.
III. A trade bloc can lead to lower firm costs by allowing firms to exploit economies of scale.

Back 6

II and III

Front 7

Empirical studies have found that joining the European Community in 1973 may have cost Britain dearly. One import reason is:
a. Trade diversion was greater than trade creation on manufactured goods.
b. Britain already traded almost exclusively with other European countries. Thus there was no room for trade creation.
c. Trade diversion was greater than trade creation on agricultural products.
d. Trade creation was greater than trade diversion on agricultural products.

Back 7

Trade diversion was greater than trade creation on agricultural products.

Front 8

_______ determine(s) which products have been produced within a free-trade area and which products have been produced outside the area and therefore are subject to barriers to entry.

Back 8

Rules of origin

Front 9

__________ is the movement of people from one country to another country in which they plan to reside for some noticeable period of time.
a. Domestic trade
b. International trade
c. Internal migration
d. International migration

Back 9

International migration

Front 10

The largest net loss to the sending country is likely to be attributable to the emigration of __________ workers.
a. Low-skilled
b. High-skilled
c. Less mobile
d. Uneducated

Back 10

High-skilled

Front 11

The loss of future tax contributions is likely to be __________ the reduction in future government spending as people migrate from the sending country.

Back 11

Larger than

Front 12

A country can increase its net gains from migration by tilting its immigration policies toward encouraging and selecting more __________ immigrants while reducing the number of __________ immigrants that it admits.
a. Skilled; unskilled
b. Unskilled; skilled
c. Old; young
d. Mobile; less mobile

Back 12

Skilled; unskilled

Front 13

The existence of migration costs implies that factor-price-equalization in the labor market is unlikely.
(True or False)

Back 13

True

Front 14

In a __________ exchange rate system there is no intervention by the government or central bankers.
a. Fixed
b. Pegged
c. Floating
d. Managed float

Back 14

Floating

Front 15

Shifts in demand away from French products and toward U.S. products (caused by forces other than changes in the exchange rate) would result in extra attempts to __________ euros and __________ dollars.

Back 15

Sell; buy

Front 16

A decrease in German residents' willingness to invest in dollar-denominated assets will shift the demand curve for:
a. Euros to the right
b. Euros to the left
c. Dollars to the right
d. Dollars to the left

Back 16

Dollars to the left

Front 17

In a __________ exchange rate system the government or central bankers intervene to keep the exchange rate virtually fixed (or pegged).
a. Fixed
b. Market drive
c. Floating
d. Managed float

Back 17

Fixed

Front 18

Which of the following groups is most likely to benefit from a strengthening of the dollar against major currencies?
a. US exporters
b. The US government
c. US consumers
d. Foreign consumers

Back 18

US consumers

Front 19

Other things equal, if American exports to Japan increase and American imports from Japan decrease, then, under a floating exchange rate system, we would expect the dollar to:
a. Weaken against the Japanese yen.
b. Depreciate against the Japanese yen.
c. Devalue against the Japanese yen.
d. Strengthen against the Japanese yen

Back 19

Strengthen against the Japanese yen

Front 20

Under a fixed exchange rate system a fall in the market price (the exchange rate value) of a currency is called a(n) __________ of that currency.
a. Revaluation
b. Devaluation
c. Appreciation
d. Depreciation

Back 20

Devaluation

Front 21

Suppose Mexico pegs the peso to the U.S. dollar. Also suppose it decides to change the value of its currency from 12 pesos/$ to 13 pesos/$. Which below is correct?
a. The peso appreciated relative to the dollar.
b. The peso was revalued relative to the dollar.
c. The peso depreciated relative to the dollar.
d. The peso was devalued relative to the dollar.
e. None of the above.

Back 21

The peso was devalued relative to the dollar

Front 22

Consider a market consisting of the U.S. demand for and European supply of €s. Starting from an equilibrium, what impact will a rise in iUS have on e$/€?
a. e$/€ ↑.
b. e$/€ ↓.
c. e$/€ will remain unchanged.

Back 22

e$/€ ↓.

Front 23

Consider a market consisting of the U.S. demand for and European supply of €s. Starting from an equilibrium, what impact will an increase in PEurope have on E$/€?
a. e$/€ ↑.
b. e$/€ ↓.
c. e$/€ will remain unchanged

Back 23

e$/€ ↓.

Front 24

Consider a market consisting of the U.S. demand for and European supply of €s. Suppose more bad news leaks out from Greece regarding its finances. What impact is this likely to have on e$/€?
a. e$/€ ↑.
b. e$/€ ↓.
c. e$/€ remained unchanged.

Back 24

e$/€ ↓.

Front 25

Consider the foreign exchange market consisting of the U.S. demand for and European supply of €s. Suppose the U.S. government announces a new technological breakthrough that will substantially enhance the productive potential of the U.S. economy. What impact will this have on e$/€?
a. e$/€ ↑.
b. e$/€ ↓.
c. e$/€ remained unchanged.

Back 25

e$/€ ↓.

Front 26

The spot rate is 1.40 $/euro and the 60-day forward rate is 1.50 $/euro. This means
a. The dollar has depreciated.
b. The dollar has appreciated.
c. The dollar is selling at a forward premium.
d. The dollar is selling at a forward discount

Back 26

The dollar is selling at a forward discount

Front 27

An exchange rate regime in which the government intervenes in the market in order to influence the market-determined exchange rate can be called either a dirty float or a managed float.
(True or False)

Back 27

True

Front 28

Today, no country fixes its currency to gold.
(True or False)

Back 28

True

Front 29

The special drawing right (SDR) is a basket of three currencies: the British pound, the U.S. dollar, and the Japanese yen.
(True or False)

Back 29

False

Front 30

Government can change domestic interest rates in order to influence short-term capital flows and thereby defend a fixed exchange rate.
(True or False)

Back 30

True

Front 31

The success of the gold standard in the period before World War I is attributed mostly to the high degree of tranquility in global markets.
(True or False)

Back 31

True

Front 32

The Bretton Woods conference created the International Monetary Fund (IMF).
(True or False)

Back 32

True

Front 33

The central feature of the Bretton Woods system was:
a. Floating exchange rates.
b. Fully fixed exchange rates.
c. Capital controls.
d. Adjustable pegs.

Back 33

Adjustable pegs.

Front 34

Faced with ever increasing outflows of gold in the late 1960’s, the United States:
a. Used contractionary fiscal policies to rid the nation of deficits.
b. Devalued the dollar in terms of gold.
c. Suspended the convertibility of dollars into gold.
d. Imposed foreign exchange controls.

Back 34

Suspended the convertibility of dollars into gold

Front 35

Which factor or factors contributed to the breakdown of the Bretton Woods system?
a. The supply of gold did not increase in line with productivity and this lack of liquidity led to global deflation and unemployment.
b. The U.S. ended its agreement to exchange dollars for gold since a lack of confidence in the dollar in 1971 led to a run on the dollar that nearly depleted U.S. gold reserves.
c. Countries, such as France in particular, engaged in beggar-thy-neighbor competitive devaluations in an effort to boost domestic income and employment.
d. All of the above.
e. None of the above.

Back 35

The U.S. ended its agreement to exchange dollars for gold since a lack of confidence in the dollar in 1971 led to a run on the dollar that nearly depleted U.S. gold reserves.

Front 36

__________ means committing oneself to an uncertain future value of one's net worth in terms of home currency.
a. Selling
b. Hedging
c. Speculating
d. Importing

Back 36

Speculating

Front 37

Assume you are a Chinese exporter and expect to receive $250,000 at the end of 60 days. You can remove the risk of loss due to a devaluation of the dollar by:
a. Selling dollars in the forward market for 60-day delivery
b. Buying dollars now and selling it at the end of 60 days
c. Selling the yuan equivalent in the forward market for 60-day delivery
d. Keeping the dollars in the United States after it is delivered to you

Back 37

Selling dollars in the forward market for 60-day delivery

Front 38

Assume you are an American importer who must pay 500,000 euros at the end of 90 days when you receive 1,000 cases of French wine at your warehouse in New York. If you do not cover this transaction in the forward market, you face a risk of loss if the euro:
a. Depreciates against the dollar
b. Appreciates against the dollar.
c. Either appreciates or depreciates against the dollar.
d. Is fixed.

Back 38

Appreciates against the dollar

Front 39

Assume you are an American importer who must pay 500,000 euros at the end of 90 days when you receive 1,000 cases of French wine at your warehouse in New York. If you do not cover this transaction in the forward market, you face exchange rate risk. The best way to remove the risk of loss due to currency fluctuations is to:
a. Buy 500,000 euros in the forward market for delivery in 60 days
b. Buy 500,000 euros now, hold them for 60 days, and then sell them at the current spot rate.
c. Sell 500,000 euros in the forward market for delivery after 60 days.
d. Buy 500,000 euros now.

Back 39

Buy 500,000 euros in the forward market for delivery in 60 days

Front 40

An investment exposed to exchange rate risk is a(n) __________ international investment.
a. Covered
b. Uncovered
c. Hedged
d. Contracted

Back 40

Uncovered

Front 41

Concerning the covering of exchange market risks—assuming that a depreciation of the domestic currency is anticipated, one can say that there is an incentive for:
a. Exporters to rush to cover their future needs.
b. Importers to rush to cover their future needs.
c. Both exporters and importers to rush to cover their future needs.
d. Neither exporters nor importers to rush to cover their future needs.

Back 41

Importers to rush to cover their future needs.

Front 42

The percent difference between the current forward exchange rate value of a currency and its current spot value is the __________ premium.
a. Investment
b. Spot
c. Forward
d. Currency

Back 42

Forward

Front 43

The __________ differential is approximately equal to the forward premium on a currency plus the interest rate differential.
a. Covered interest
b. Uncovered interest
c. Covered currency
d. Uncovered currency

Back 43

Covered interest

Front 44

Which of the following choices for an investor starts with dollars and wants to end up with dollars is an example of covered international investment?
a. Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial instruments, and sign a forward exchange contract to buy the foreign currency.
b. Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial instruments, and sign a forward exchange contract to buy dollars.
c. Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial instruments, and then buy dollars at the future spot rate.
d. Buy a dollar-denominated financial asset.

Back 44

Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial instruments, and sign a forward exchange contract to buy dollars.

Front 45

Which of the following choices for an investor starts with dollars and wants to end up with dollars is an example of uncovered international investment?
a. Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial instruments, and sign a forward exchange contract to buy the foreign currency.
b. Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial instruments, and sign a forward exchange contract to buy dollars.
c. Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial instruments, and then buy dollars at the future spot rate.
d. Buy a dollar-denominated financial asset.

Back 45

Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial instruments, and then buy dollars at the future spot rate.

Front 46

Suppose the interest rate on 6-month treasury bills is 7 percent per year in the United Kingdom and 4 percent per year in the United States. If today’s spot price of the pound is $2.00 while the 6-month forward price of the pound is $1.98. By investing in U.K. treasury bills rather than U.S. treasury bills, and covering exchange rate risk, U.S. investors earn an extra return for the 6 months of:
a. 0.5 percent
b. 1.5 percent
c. 2.5 percent
d. 3 percent

Back 46

0.5 percent

Front 47

Suppose the interest rate on 6-month treasury bills is 7 percent per year in the United Kingdom and 4 percent per year in the United States. If today’s spot price of the pound is $2.00 while the 6-month forward price of the pound is $1.98. If the price of the 6-month forward pound were to ____________, U.S. investors would no longer earn an extra return by shifting funds to the United Kingdom.
a. Rise to $1.99
b. Rise to $2.01
c. Fall to $1.96
d. Fall to $1.97

Back 47

Fall to $1.97

Front 48

If the expected uncovered interest differential is __________, then the expected overall return favors uncovered investing in the foreign-denominated currency.
a. Positive
b. Negative
c. Zero
d. Unchanged

Back 48

Positive

Front 49

When short-term interest rates become lower in Japan than in New York, interest arbitrage operations will most likely result in a(n):
a. Increase in the spot price of the yen.
b. Increase in the forward price of the dollar.
c. Sale of dollars in the forward market
d. Purchase of yen in the spot market

Back 49

Sale of dollars in the forward market

Front 50

If the forward premium of the euro is positive, the exchange market’s consensus is that over the period of a forward contract, the euro’s spot rate will:
a. Depreciate.
b. Appreciate.
c. Remain constant.
d. Devalue.

Back 50

Appreciate.

Front 51

If the forward premium on the dollar is zero while the interest rate on US T-bills is 4% and interest rate on British T-bills is 6.5%, the covered interest differential is in favor of:
a. Buying
b. Investing.
c. The United Kingdom.
d. The United States.

Back 51

The United Kingdom.

Front 52

If the dollar is selling at a forward premium against the British pound of 3% while the interest rate on US T-bills is 4% and interest rate on British T-bills is 6.5%, the covered interest differential is in favor of:
a. Buying
b. Investing.
c. The United Kingdom.
d. The United States

Back 52

The United States

Front 53

Which of the following is NOT linked together by uncovered interest parity:
a. The domestic interest rate.
b. The foreign interest rate.
c. The current spot exchange rate.
d. The current forward exchange rate.

Back 53

The current forward exchange rate.

Front 54

If investors expect a depreciation of the Thai baht, their actions will:
a. Drive down Thai interest rates.
b. Cause that expected depreciation to occur very quickly.
c. Cause the Thai baht to appreciate.
d. Cause a large inflow of foreign capital into Thailand

Back 54

Cause that expected depreciation to occur very quickly

Front 55

Hedging a position exposed to exchange rate risk is the act of reducing or eliminating a net asset or net liability position in the foreign currency.
(True or False)

Back 55

True

Front 56

If a currency is at a forward premium by as much as its interest rate is lower than the interest rate in the other country, covered interest parity holds.
(True or False)

Back 56

True

Front 57

A country with an interest rate that is lower than the corresponding rate in the domestic country will have a forward premium on its currency.
(True or False)

Back 57

True

Front 58

Covered interest parity is rarely found to hold empirically
(True or False)

Back 58

False